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Innovators in Control

During a recent business trip to California, I took a detour to San Diego to visit a childhood friend, a Ph.D. microbiologist who relocated there from Russia a few years ago.

In the late 1970s, after my freshman year in college, I had spent a summer frying chicken at the local amusement park. I had hoped to do something more meaningful, but jobs were so few that my only alternative was to hang out on the beach. San Diego was a provincial town inhabited mainly by U.S. Navy retirees and their Mexican gardeners.

Not any more. It is a thriving, international metropolis. In the intervening decades, the southern tip of California has become a world capital of the biotech industry clustered around its world-class natural sciences research institutes. My friend works at Burnham Institute in La Jolla and his social life revolves around scientists and researchers from the former Soviet Union, all of whom have made a new home in San Diego in recent years.

San Diego provides an answer why recent hand-wringing about the terminal decline of American economic primacy is nothing but empty talk, and why the United States will maintain a solid lead in technological innovation for the foreseeable future.

The Age of BiotechThe biotech industry has always been similar to Brazil. For decades, the South American giant has been touted as the coming economic superpower. On paper indeed it was, complete with a huge territory, a market of over 100 million undersupplied consumers and natural resources. Sao Paulo has always been Latin America's most powerful industrial hub. Yet, despite these advantages, Brazil has remained a sleeping giant.

Biotech, too, has frustrated investors for a long time. It seemed to have all an investor would need to make a killing, from cutting-edge science to huge potential markets comprised of aging baby boomers needing new pharmaceuticals and the hungry masses around the world clamoring to be fed. Yet, while some companies or products grew successful, the overall industry has been a notorious black hole.

As ads for mutual funds are fond of saying, past performance does not guarantee future results. Where is it written that biotech will continue losing money forever? In this decade, even Brazil has emerged as a star performer, both in terms of economic growth and stock market gains. The biotech industry, too, is about to move to the forefront of the global technology revolution.

Revisiting MalthusBritish demographer Thomas Malthus became alarmed 200 years ago that Planet Earth would soon run out of resources and would not be able to provide enough food, water, air and commodities for its expanding population.

Since then, the human race has multiplied far beyond anything Malthus ever thought possible, increasing from less than 1 billion in 1800 to around 6.5 billion now. Remarkably, while human society consumes vast amounts of commodities and food, there are still enough scarce resources to go around.

Nevertheless, fears of Malthusian scarcity emerge periodically, especially when commodity prices begin to rise. In the 1970s, the looming food crisis was resolved relatively easily, thanks to the green revolution brought about by the introduction of modern fertilizers and farming methods into India and other parts of Asia and industrial agricultural practices in traditional food-producing countries. Food, as well as other commodities, became extremely cheap once more in the 1990s, and the fears of looming shortages were thoroughly forgotten.

Now, commodity prices are up and forecasts as to when the world will run out of natural resources are fashionable once more -- just in time to reward those investors who had the persistence to keep funding biotech research. Genetic engineering holds out a promise to raise agricultural output dramatically, and high prices are already breaking down resistance to GE products. One difference from the past is that in the world's most populous countries such as China, India and Brazil people not only want more food and greater variety, but for the first time ever they also have money to pay for it.

Over the past year, the rising prices of food and energy have been closely correlated, since incentives for ethanol production have boosted corn prices and, in a chain reaction, put upward pressure on food prices across the board. This too is a problem tailor-made for the biotech industry. Earlier this year, General Motors took stakes in two companies backed by billionaire investor and Sun Microsystems founder Vinod Khosla, both of which are seeking to produce ethanol from non-food ingredients such as wood chips, agricultural byproducts and industrial and municipal waste. One company expects to mass produce ethanol by 2010 for $1.00 to $1.50 per gallon. Half of GM cars sold in 2012 will be flexible vehicles capable of running on an 85 percent/15 percent brew of ethanol and gasoline.

Innovation LeadershipFor a long time, high-tech industries in Japan, South Korea, Taiwan and even parts of Western Europe have been competing with Silicon Valley. For all their undeniable success, there has been little tangible evidence that they are pulling ahead. The most important, profitable and innovative companies in what in the late 1990s used to be called "the new economy" are still overwhelmingly American. By and large, these rivals imitate and even in some cases improve American ideas, but new technological frontiers and their commercial applications are still explored predominantly in the United States.

Moreover, even if some are catching up in the information technology field, the problem is that the technology revolution is starting to shift its focus to biology. American companies are, once more, in the forefront of this shift.

There are fundamental reasons why it is so. Recently, it has been repeatedly predicted that China will not only dethrone America as the world's largest economy in terms of bulk GDP but will pull ahead of the United States in the technology race. The Chinese government is investing heavily into its scientific establishment and U.S. venture capital funds have also channeled several billion dollars each year into Chinese start-ups. China, it has been pointed out, was once the world's greatest innovator, inventing such fundamental things as paper, gunpowder and printing. Even if it regains its competitive edge some time in mid-century, it will only be a temporary hiatus in an otherwise lengthy historical record of innovation.

There is serious doubt that China -- a highly bureaucratized society where corrupt communist officials, not businessmen and entrepreneurs, make all the decisions and where laws, especially intellectual property laws, are notoriously weak -- could give the United States a run for its money. But American advantages go a lot further than that. This country has always maintained an unmatched science and research infrastructure, garnering a lion's share of patents and numerous Nobel Prizes in hard sciences. Over the past two decades, it has been linked to an equally formidable business infrastructure. The resultant system has been uniquely well-suited to generate innovative ideas, sell them to entrepreneurs and then reward both inventors and investors with a variety of profitable exit strategies.

This system has worked so well that the best international talent flocks to the United States to take advantage of this -- even from countries that invest into their technology sector. After 9/11, the number of foreign students coming to study at U.S. colleges and universities declined -- largely because of tighter entry requirements. However, the situation has already been reversed once more, especially after Secretary of State Condoleezza Rice instructed U.S. consular personnel to be more accommodating to prospective students.

Vinod Khosla is a typical example of a foreign-born high-tech entrepreneur, one of hundreds if not thousands who continue to contribute and solidify U.S. leadership in the technology sector.

My friend working in La Jolla is another. He supervises a team of researchers who have come from every corner of the globe. However, unlike a typical academic in his ivory tower, he is forced to be an entrepreneur as well, and not only because he once worked at a biotech startup in Chicago. One positive thing that the otherwise harmful reduction of government funding for academic research has brought about has been to prompt him and his colleagues to become more entrepreneurial in finding financing for their research. Inevitably, they have been tapping venture capital investors. The market has deeper pockets and many more potential funders then the government. It may be stricter in its timetables, but it is also more adept at identifying the Big Idea than a bunch of government bureaucrats.

This is a system in which researchers, inventors, innovators and entrepreneurs are in control. They sink or swim on their own merit, unlike China and other highly bureaucratic societies, where they are told where to swim and how.

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at abayer@kafanfx.com. His monthly "Global Economy" column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past five years, 2004-2008.

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